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09 21 2015 | by Victor Xing | Capital Markets

Why are some asset managers referred to as non-banks?

Fidelity and a number of U.S. financial institutions can be described as part of the shadow banking system – institutions that performs traditionally banking services but technically outside of the banking system (as well as the intense financial regulations imposed on the sector post 2008)

Since the topic here is Fidelity, I would like to quote its own article Do you really need a bank? – Fidelity Investments.  Fidelity’s website provided examples of its bank-like functions:

The case for brokerage firms

The financial crisis has brought new regulatory challenges to brokerage firms as well. Nonetheless, some of the above-mentioned issues have spelled opportunities for brokerage firms, particularly those whose business models never relied heavily on branches. “Brokerage firms saw a great opportunity to look at their services and find ways to close the gap with banks,” says McLimans. For example, some brokerage firms now offer:

FDIC insurance

Consider FDIC insurance. Bank accounts are FDIC insured up to $250,000.5 But at some brokerage firms (Fidelity included), it is now possible to have uninvested cash balances swept to multiple banks, making those balances eligible for well over $1 million of FDIC insurance coverage.6 “If you wanted to do that at a bank, you’d have to set up differently titled accounts or have your funds literally placed in different banks,” says McLimans. “A more convenient way to gain the expanded coverage may be to open one account at a brokerage provider that can automatically cascade your assets throughout its bank network coverage, rather than having separate deposits in a bank or multiple banks.”

Cash management services

Brokerage firms don’t have as many branches as most major banks, so in the days before online banking, it was difficult for them to offer services that required initial branch visits, such as direct deposit or bill payment. Now that online and mobile banking is widespread, some brokerage firms offer a wide range of services, including direct deposit, mobile deposit, and online and mobile bill payment, as well as check-writing capabilities and debit cards linked to brokerage accounts, most of which previously were solely the domain of banks.

Credit cards linked to investment accounts

Some brokerage firms partner with third parties to offer their customers credit cards that may provide a boost to an individual’s investment account. For example, clients using a brokerage-linked credit card might accumulate cash rewards that are deposited in their retirement or investment accounts.

Relief from fees

Many brokerage firms are targeting disgruntled bank consumers by offering cash management services with no or low fees. For example, brokerage firms may offer free check-writing capabilities and reimbursement of ATM fees.

Trouble-free transfers to brokerage accounts

Some brokerage firms allow their clients to link checking and other banking accounts with their investment accounts. This arrangement simplifies the process of transferring money in and out of brokerage accounts—giving clients access to their cash when they need it, or enabling them to add to their investment portfolio quickly and easily. Moreover, consumers can arrange for brokerage assets to cover overdrafts on checking accounts, potentially avoiding steep fees.

Next article09 20 2015 | by Victor Xing | Central Banks

Has the Federal Reserve stopped buying bonds?